Why Risk Management is the Key to the Survival of NBFCs
Published: November 20, 2019
While a few NBFCs exhibited robust growth, most disruptive and conservative NBFCs weren’t left unscathed by the current downtime. And though the government has created reforms and policies to get NBFCs back on track, the road ahead is neither short or smooth, making it important to strengthen their risk management frameworks.
Risk management impacts and NBFCs potential to attract raise funds from primary markets in the short-run and enlist on the stock exchange further down the line. Financial institutions can no longer afford to sit back and wait for yet another disaster to strike but must proactively identify and mitigate both internal and external risks. An ASSOCHAM report that was released shortly after the liquidity crisis of 2018, identified the key risks faced by NBFCs and the risk management techniques to manage liquidity and avoid insolvency:
Credit risk– A Credit Risk for Indian Corporates report in 2015, found that though the average default risk of Indian organizations has improved since 2008, their risks have also remained higher than for those of other Asian, US and European firms. The management of credit risk involves setting up standards and policies for operating procedures that are reviewed on a regular basis. To mitigate this risk, NBFCs a robust system of credit line management for various transactions including over-withdrawals, loan approvals, account inactivity, etc are necessary. These measures must also be audited internally to ensure that the company stays on track.
Vendor risk– The vendor risk management market size is expected to grow from USD 3.29 Billion in 2017 to USD 6.50 Billion by 2022. Outsourcing activities such as data entry, documentation, and field verification to third-party vendors, leaves them open to a plethora of risks. In order to minimize their exposure, the vendors they deal with must be carefully selected through an unbiased system that solely considers the service providers operating model and qualification to meet their needs. These services must also be supervised and audited to ensure quality, with penalties for the failure of meeting service levels.
Compliance reviews– The recent influx caused by the NBFC crisis and regulations set for NBFCs has made conducting compliance review compulsory. The companies should create a comprehensive framework that ensures it adheres to the guidelines set at all times.
Quality control– Apart from the above risk management techniques, quality controls must also be carried out to ensure that the functions of non-banking financial institutions are in line with the standardized stipulated processes.
Information and data integrity– Financial institutions have access to a significant volume of confidential customer data which needs to be secured against leaks. Data breaches of any kind could affect the finances of customers and in turn the reputation of the NBFC. Cybersecurity is key to maintaining the integrity of the data and the company.
They often say lightning never strikes the same spot twice, but the IL&FS crisis seemed to have sent the NBFC sector into a downward spiral with no foreseeable end. What started out as a default by one company, resulted in a domino effect that adversely affected the NBFC sector and in turn a decline in the growth of GDP. If effective risk management models and risk management processes are put into play in the NBFC sector inadequacies can be detected and rectified before it escalates into a crisis.
As one such NBFC, Capri Global assesses the risks posed and have counter measures in play to overcome them. We firmly believe that traditional financing needs to be reoriented for the informal sector, while we leverage technology to foster an air of trust and transparency that helps us serve customers better.
Our field-based credit assessment with robust risk controls enables us to evaluate risks and ensure adherence to stringent standards of governance and regulatory requirements. Our branch network let us take a relationship-driven approach with each customer at a local level. This helps us arrive at an optimal home finance requirement, speed up disbursal and ensure regular and disciplined collections.